There has been a ton written and a lot of numbers thrown around regarding this ruling. We need to break it down into two separate issues. Does this make it easier for MBIA (NYSE:MBI) to collect from Bank of American (NYSE:BAC)for “losses it suffered” as a result of Countrywide misrepresentations? Yes. I’m not sure that anyone really thought MBIA wasn’t going to collect something on that issue. The second and far larger issue is the “put back exposure”. This has been what much has been written and I’ve seen places where hundreds of billions of dollars of “put back risk” was being hung on BAC. On this issue, the judge's determination, while not a “win” for BAC, definitely was a ruling which I would say materially reduced those risks.
Reuter’s Allison Frankel is hands down by far doing the best “non partisan” so-to-speak analysis on the legal front.
Tuesday’s parallel rulings by Manhattan State Supreme Justice Eileen Bransten in MBIA and Syncora suits against Countrywide were a big win for the bond insurers. The judge concluded that MBIA and Syncora need only show that Countrywide materially misled them at the time they agreed to write insurance on Countrywide mortgage-backed notes, not that the alleged misrepresentations led directly to MBS defaults and subsequent insurance payouts. Bransten is considered a leading judge on MBS issues, so her grant of summary judgment on the insurance fraud and contract issues should be a boon to all of the monolines engaged in do-or-die litigation with MBS issuers.Where are we at now? Let’s keep in mind this suit was filed in September 2008 which means we are 3.5 years in and still do not have a trial date. Will we ever see a trial? No. I’m not thinking MBIA wants to wait another 3-5 years to see a penny. While the suit did bolster their recovery of losses claims, it did dampen the “put back” avenue. MBIA will likely be able to recover “losses” only on insurance payouts on those payouts they can prove a “material misrepresentation.” Losses are defined as payouts-premiums received. Essentially they seek to make the insurer whole, as if the policy was never written. The insurer is not to gain a windfall on the deal.
But for MBS investors hoping Bransten would set a low bar for claims that Countrywide breached mortgage-backed securitization agreements, the rulings have to be considered a disappointment. Both Syncora’s lawyers at Debevoise & Plimpton and MBIA’s counsel at Quinn Emanuel Urquhart & Sullivan had moved for summary judgment on a baseline question: could they demand that Countrywide repurchase any underlying mortgage loan that materially breached the MBS issuer’s representations and warranties in securitization agreements?
If Bransten had agreed with the Syncora and MBIA interpretations of the agreements’ put-back clauses, the bond insurers would have had to show only that an underlying loan was deficient, not that the alleged deficiency contributed to the mortgage’s default — or, for that matter, that the underlying loan even was in default. The insurers wanted the judge to rule that as a matter of contract, Countrywide was required to repurchase every flawed mortgage in underlying pools.
Had Bransten adopted that reading of the contracts, she could have swung untold billions in MBS liability from investors to issuers. As you surely recall, the embattled BofA $8.5 billion settlement with Countrywide MBS investors was the result of put-back claims of an institutional investor group led by Black Rock and Pimco and represented by Gibbs & Bruns. The same investors have since asserted put-back claims against Morgan Stanley (based on notes with a face value of $6 billion) and JPMorgan Chase (based on $95 billion in MBS). Other investors, publicly and anonymously, have called upon MBS trustees to act on their put-back claims; most recently, U.S. Bank, as trustee in some Bear Stearns MBS trusts, filed a $95 million summons against JPMorgan Chase in New York state court. A ruling from a leading judge that set a low bar for put-backs would have given the investors asserting reps and warranties claims huge leverage over MBS issuers.
But Bransten denied the MBIA and Syncora summary judgment motions on Countrywide’s put-back liability. Specifically, she found that the securitization contracts were ambiguous on several points so the bond insurers’ contract-related claims couldn’t be decided on summary judgment. That doesn’t necessarily mean that after considering the two sides’ interpretations of the contract, as well as industry practice, an ultimate fact-finder won’t agree with Syncora and MBIA on put-backs; Bransten said, in fact, that MBIA had “posited a strong argument” for its view of one securitization contract. Moreover, MBIA and Syncora have alternate routes to the same recovery they’re claiming from alleged reps and warranties breaches.
Nevertheless, the implication of Bransten’s rulings is that put-backs will remain a loan-by-loan slugfest, at least until another judge considers the issue. That’s good news for BofA — which has signaled in regulatory filings that an adverse ruling on put-back loss causation would significantly change its reported liability — and for other MBS issuers as well. Bank disclosure of put-back liability has become a heated topic, and several banks beefed up disclosures in third-quarter 2011 filings. But MBS issuers escaped calamity thanks to Bransten’s refusal to endorse the bond insurers’ liberal reading of securitization agreements
The put-back claims look like they are going to be debates on a loan-by-loan basis. No way MBIA wants this, no way. It will take many years.
What this ruling means IMO is that BAC will pay a bit more for for “losses” at MBIA but its potential put-back risk, a risk many have assumed was all but definite, just got a whole lot smaller. Bottom line is the two will come to a global agreement as there is no way either wants either case to go before a jury, as the complexity would be so staggering as essentially to render a trial a roll of the dice for both sides. Given most grandmothers I know have yet to master a remote control, I simply can’t imagine them considering what causational relationship the housing collapse had on a BBB-rated tranche of an MBS Securitization.
How much then? MBIA has booked $2.8 billion for “anticipated recoveries” in these cases from the banks without a specific amount from each bank. I do not know how much of that is BAC’s (um, no one does, by the way), but even if we assume all of it is, $2.8 billion is easily payable and a whole lot less than the $400 billion numbers the alarmists were throwing around. Let’s always keep in mind that BAC has $36 billion in reserves and generates approximately $30 billion annually. Any settlement needs to be put in perspective in regards to the size of the institution.
For those thinking the run in BAC’s stock this week was due to the latest housing-fix rumors. I would disagree. I would day it is large investors digesting this ruling and coming to the conclusion BAC’s risk just got a whole lot smaller
MBIA-Countrywide Ruling (click to open pdf)